Inside the Star

Which term life policy is best?

Talk with enough insurance agents and brokers and you get the idea that good term life insurance is like those rugby pants you keep in your closet; the elastic waistband ensures a snug and comfortable fit today and can be counted on to fit equally well should circumstances change.

Is term life insurance sexy? No, but it's as important as pantys and you need elasticity built in to accommodate change.

By:Terrence BelfordSpecial to the Star, Published on Sat Aug 14 2010

Talk with enough insurance agents and brokers and you get the idea that good term life insurance is like those rugby pants you keep in your closet; the elastic waistband ensures a snug and comfortable fit today and can be counted on to fit equally well should circumstances change.

“Term life insurance is one of the simplest things to understand and to buy,” says Jonathan Matthews, a consultant with Firstbrook Cassie & Anderson Insurance. “The trick is in getting the policy that perfectly suits your needs now and in future.”

Term life is just as the name suggests. You buy a policy for a fixed amount payable on death to your beneficiaries. The policy is in force for a specific term — from one to 25 years or more. Premiums are a fixed amount and increase every year.

When the term expires, you can hunt around for the best deal or opt to renew with your existing carrier. That insurance company cannot refuse to renew, no matter what the state of your physical health, but it does have the right to charge considerably more, according to the risk involved.

“If you can produce a doctor's report showing medical evidence you are in good health when it comes time to renew, then you can shop around,” says Matthews. “Without that medical evidence, however, few other insurers will touch you without charging a very high premium. If you want life insurance, it pretty much has to be with your current term life insurer.”

While 30-year-olds just starting a family may not think much of what shape they will be in by age 40 or 50, it is one of those things a good agent will raise, says Allen Wong, president of Allen Wong & Associates Insurance Agency of Thornhill.

“There are so many different carriers offering term, and so many different types of policy, and everybody has their own different needs. What you want is an agent that can really understand your circumstances today and help you look into future needs as well,” he says.

There are some rules of thumb to follow. First, you want a policy that covers all existing debt at the time of your death, including a mortgage, car payments and anything else you can think of. Then, the policy should be big enough to replace the breadwinner's income for his or her family.

“If the spouse is a working wife, you have to take the same approach as a working husband,” says Asher Tward, vice-president estate planning at Tridelta Financial Partners.

“If the spouse is a homemaker, think about the cost of the services you will need to replace his or her efforts — cleaning, laundry, meal preparation, looking after the children...

“People often overlook just how much homemakers contribute and how expensive it is to replace them.”

The agents suggest insurance for anywhere from 10 to 30 times annual income.

Agents and brokers are of two minds when it comes to getting insurance for children. Some, such as Matthews, suggest they do not need life insurance, because they have no income potential until they start working.

Others, such as Tward, suggest a whole life policy at an early age.

“Not for the death benefits, but to ensure they have coverage should they fall ill at some later stage, [and so] they will be ensured coverage in a plan where the premiums do not rise,” he says.

The idea of creating a custom policy also applies to deciding how long the term should be: One year, five years, 10, or more.

The thing to keep in mind is that term policies allow you to know in advance exactly what the annual premiums will be for the length of that term. Renewal, however, can comes as a shock.

“If you took at 10-year-term at age 40, when it came time to renew at age 50, you would likely find premiums are up significantly,” says Wong. “If, in the meantime, you have contracted a serious disease like cancer, you will be uninsurable by any other carrier, and will find, if you want insurance, you have to pay whatever premium your current company asks.”

Jeff Cait, director of tax and estate planning at IDC Financial in Mississauga suggests laddering term policies as need for coverage grows. “When you get married, you might buy some at 10-year term, then another 10- or 20-year policy, when the first child is born, and the same when a second child is born,” he says. “Paying for the premiums in this way is like cost averaging in stocks.”

As for cost, term insurance can be remarkably cheap.

“If you shop around, a healthy 30-year old can get a $1-million term policy for as little as $40 to $50 a month,” says Matthews.

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